In this opportunity we would like to delve into the possible economic and market impacts, and the risks and opportunities that may arise, depending on the results of the election.
In terms of elections, it should be noted that, although the election is still open three weeks away, it is quite remarkable the rebound shown by the Republican candidacy of former President Donald Trump and, at the same time, the sharp fall -especially in the betting markets- of the Democratic candidate Kamala Harris, which has led the financial markets to start discounting a Trump victory and even a possible "Republican sweep". This is evidenced by the strength of the dollar, stocks at record highs, sector leadership in the financial sector, a steeper interest rate curve and the rise of Bitcoin, to name a few of the so-called "Trump Trade".
USA: 2024 Election Forecast
Swing Stales Polls
Balance of Power: 2024 Election
In the immediate term, despite the short-term volatility in markets around election season, U.S. equity performance tends to be fairly "indifferent" to which party takes control of the White House, even more so if Congress is divided. As a starting point, then, it seems to be somewhat "futile" to associate a market outlook with partisan aspiration.
Generally, markets have gone up under both Republican and Democratic presidents, and the reason is quite simple and statistical... markets simply go up and, over 100 years of modern history, the compound annual growth rate is virtually identical under presidents of both parties.
So, timing matters, circumstances matter, luck matters, the Fed matters. And yes, presidential politics matter. But what doesn't seem to matter? Party affiliation.
S&P 500 performance under Republican and Democratic administrations
However, where it is possible to see some particular impacts is at the sectoral level. To do so, it is necessary to put into perspective the main economic proposals of both candidates.
Republicans would focus on deregulating the economy and creating positive fiscal momentum from tax extenders.
Trump could replace Jerome Powell, which could lead to unpredictable changes in Fed policy.
Also, there could be a greater risk of increased tariffs against China and moderate risks against global tariffs. Mega-cap stocks could be affected by higher tariffs given the additional costs that would arise from relocation and Chinese retaliation against these control measures.
But, in general, highly regulated industries, such as healthcare, energy and the financial sector, are potential relative winners under a Trump presidency.
Democrats could generate negative fiscal momentum from the expiration of the tax cuts (Harris would like to raise taxes on anyone earning more than $400,000 a year and wants to raise the corporate tax rate to 28 percent) and maintain the status quo on Federal Reserve policies. Chairwoman Harris is likely to build on Joe Biden's Build Back Better plan, and there would be extended support for child tax credits.
Vice President Harris is more likely to maintain current tariffs against China while at the same time organizing more targeted export controls for certain Chinese sectors.
But in both cases, policies around tax cuts and increased child tax credits may have a positive impact on the consumer discretionary and technology sectors.
Lower corporate tax rates would lead to increased spending on research and development and other innovation initiatives around artificial intelligence and cloud data management capabilities, which could help boost the technology sector.
Where do we see the main risks?
If elected president, Donald Trump could support a full extension of the Tax Cut and Jobs Act of 2017 with partial tax offsets, while Kamala Harris could maintain middle-class tax cuts while levying additional taxes on the wealthy and reintroducing a higher corporate tax rate. Ultimately, the economic policies and measures proposed by both candidates are likely to contribute to the increase in the fiscal deficit, although the deficit is expected to be larger under a Trump presidency.
So then, the one area where it is safe to assume that things will not immediately improve with either candidate is government spending and the debt that supports that spending.
The most bipartisan thing about America is that government spending continues to grow. The national debt was $19 trillion when former President Trump took office, and $28 trillion when he left office. Vice President Harris has seen the debt increase another $7 trillion.
From welfare spending to debt-to-GDP ratios (exceeding 100%) and absolute debt levels, there is an unsustainable dynamic that cries out for solutions. There are some solutions, but none that are painless. In any case, none of those solutions are on the ballot in 2024.
A potential Trump victory could be a problem for the bond market, but potentially for stocks as well. Market expectations of fiscal expansion, reflation and less regulation under a presidency could boost Treasury yields (a steeper yield curve), given that his first term was marked by reflationary tactics, from tariffs to tax cuts.
Those tactics were welcome during Trump's tenure, as evidenced by the stock gains in his first term, but today the situation is very different as inflation appears to be more under control, but not dead.
And the narrative of disinflation and monetary easing by the Fed faces few risks through 2024, but there is a lack of consensus on the outlook for 2025, as the election has the potential to generate higher tariffs, higher inflation and higher fiscal spending.
Finally, in a Trump administration, the macroeconomic policies he suggests could be dollar positive (corporate tax cuts, tariff increases and deregulation in the U.S.), but "monetary interventionism" could severely undermine dollar confidence and drive the dollar lower.
Humberto Mora
Investment, Finance, and Business Manager; Stockbroker
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U.S. 2024: Keys to understanding a crucial election
